Alas! Taxes are the bane of our lives and there’s just no escaping them. Like Benjamin Franklin said, “In this world, nothing is certain except death and taxes.”
He’s absolutely right. If you stopped to think about it, a flat tax rate on one’s income would truly simplify the process. The more you earn, the more you pay. It would be fair. Yet, the tax code is complicated and convoluted.
There’s a reason for this… and one might even surmise that amidst all the complications, it’s easy to insert legal loopholes that allow multi-billion dollar companies to legally pay less taxes than the average citizen.
It’s not fair… but that’s the way it’s set up. For you to legally reduce your taxes, you’ll need to play the same game too. You’ll need to understand the loopholes and structure your financial planning in a way to legally avoid paid taxes.
The key word here is ‘legally’. Tax evasion is a crime. You don’t want to end up with a fine or behind bars. Use the pointers below to legally reduce your taxes.
Maximize your retirement savings
Leveraging the tax advantaged accounts that are available to you is one of the best ways to reduce your taxes while you save for retirement. It’s a win-win here.
Contributing to a retirement account such as an IRA or 401(k) is not only an excellent way to squirrel money away for your retirement but you can also deduct these sums from your taxable income.
Key point to note: Contribute to an IRA and stash money in your 401(k) too.
So, not only are you saving more, but you’ll be paying less taxes. These savings will be tax-free until you retire, when you pay tax on them. Whatever it is, you’ll be reducing your taxes in the short run.
Watch out for tax credits
Child tax credit, lifetime learning credit, American opportunity tax credit, are all credits you can use to reduce your taxable income. The key is knowing how to maximize them.
So study the tax code or hire a CPA to find ways to use as much tax credit as you can to lower your taxes. It’s best to hire a professional to guide you here. You only need to learn the loopholes once and you can leverage them for years.
Different structures
The reason billion-dollar companies pay less tax (comparatively) than you is because they are under a different tax structure. Generally, there are about 5 different structures.
- Individual
- Sole proprietorship
- Partnerships
- LLC
- Trust
Choosing a structure will avail you to the tax advantages it has. This will depend on your finances and your reserves. Once again, you’ll want to speak to a professional tax advisor here.
What assets are you holding on to?
The types of assets you own will determine how much taxes you pay too. For example, if you have money invested in stocks, you’ll pay lower taxes on your dividends and any capital gain you make from your stocks.
This is because the tax rates are more favorable than what you’d get with bonds and other investments which are less tax-efficient. Speak to a tax advisor and learn how to invest your assets in a way that will help you pay the least amount of taxes you can.
Have a health savings account
Contributions to a health savings account can be deducted from your taxable income. You can withdraw them for your medical expenses without incurring penalties. It’ll be a good idea to keep all your medical receipts, etc. so that you can deduct them from your taxable income.
Start a side business
One of the best ways to reduce your taxes will be to start a side business online from your home. You can call one room in your house a home office. If it makes up 20% of your home’s living space, you can deduct 20% off your utility bills and rent.
Of course, you’ll want to make it look like an office and actually have an online business. Not only will you be able to reduce taxes, but also increase your income if you profit though you’ll need to pay taxes on that too.
Other methods
Besides the ones mentioned above, you can use other methods such as claiming expenses as a tax deduction (if you own a business) or take advantage of your filing status.
Another way would be to move some of your income to other family members. You can also make spousal contributions, put your money in an investment bond and much more.
What you need to know is this there are definitely ways to legally reduce your taxes. You just need to find them and use them wisely. If you find it too complicated, hire a CPA to guide you here.
Hiring a qualified professional is a wise investment and will help you pay less taxes for years. So, do what you need to in order to proactively reduce your taxes.
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